Integrative Case 7-69 (Algo) Predetermined Rates, Job Costing, Service Firms, Product-line Profitability (LO 7-3) A&R Quality Advisors is a small consulting firm offering quality audits and advising services to small and mid-sized manufacturing firms. Quality audits entail reviewing, checking, and documenting quality practices within a firm. Quality advising entails making recommendations for new or revised quality practices. Other firms in the area offer one or both of these services, although the competition for quality audit jobs is stronger than for quality advising. In addition to senior executives, A&R employees are either staff or managers. Staff employees are usually younger with less experience. Managers, who oversee the staff on jobs, are more experienced. The average hourly wage is $110 for staff and $275 for managers. (Both staff and managers are paid an annual salary, these hourly costs are based on 2,000 average annual hours worked.) Staff are expected to spend at least 90 percent of their time on billable work. Because of administrative work associated with supervising the staff and the expectation that managers will spend a portion of their time seeking new business, managers are expected to spend about 50 percent of their time on billable work. A&R employs ten staff and two managers. In addition to staff and manager costs, A&R has overhead and administrative costs of $5,500,000, of which about $1,833,000 is variable with respect to billable hours. Overhead and administrative costs include the non-billable cost of the staff and managers. Selected information on billable hours expected for the next year follow. Billable Audit Billable Total Billable Advising Hours Manager Manager Staff Manager client 01 Client 02 140 20 140 client 03 Hours Hours Staff 160 370 OON Staff 210 0 90 20 0 25 42 20 65 230 320 Client 49 client 50 Total 50 310 9,000 12 30 1,700 0 210 10,000 0 25 1,300 50 520 19,000 12 55 3,000 Although not all clients use A&R for both services, about 70 percent do. A&R bills audit services based on billable hours and advising services at a fixed fee. The cost for audit services is determined by multiplying the billable hours by the quoted employee rates. Staff rates for the following year are $250 per hour and manager rates are $625 per hour. The rates are set to meet the competition in the area. To determine the cost (not the price) of the job, A&R uses a job costing system. To the employee costs (not the billing rates) is added an amount for overhead based on the predetermined rate and the billable hours in the job. The predetermined rate is based on expected billable hours. Total revenue at A&R next year is expected to be $10 million. The two founding partners of A&R are looking at these forecasts for next year and trying to decide whether to drop one of these services. "We should probably become more focused, as we sometimes remind our clients." Required: a. What is the predetermined overhead rate for costing jobs in the following year? b. How much will Client 02 be billed for audit services next year? c. How much will the job costing system report as the cost of Client 02 audit Services next year? d. What will be the total revenues from audit services next year based on the expected hours and the billing rates? e. Based on the job costing system, what will the reported cost of audit services be next year? f. Based on the job costing system, what will be the cost of advisory services? g. What is the expected profit of audit services next year? h. What is the expected profit of advisory services next year? Complete this question by entering your answers in the tabs below. Req A Reg B and C Reg D Reg E and F Req G and H What is the predetermined overhead rate for costing jobs in the following year? Predetermined overhead rato per billable hour ROGA ReqB and C > Complete this question by entering your answers in the tabs below. Req A Req B and C Reg D Reg E and F Re Gand H b. How much will Client 02 be billed for audit services next year? c. How much will the job costing system report as the cost of Client 02 audit services next year? (Enter your answers in dollars and not in millions of dollars.) b. Client 02 audit billing Cost of Client 02 audit services C. Complete this question by entering your answers in the tabs below. Req A Req B and C RegD Reg E and F Reg G and H What will be the total revenues from audit services next year based on the expected hours and the billing rates? (Enter your answers in dollars and not in millions of dollars.) Total revenue from audit services Complete this question by entering your answers in the tabs below. Req A Reg B and C Reg D Reg E and F Reg G and H e. Based on the job costing system, what will the reported cost of audit services be next year? f. Based on the job costing system, what will be the cost of advisory services? (Enter your answers in dollars and not in millions of dollars.) Amount Reported e. Cost of audit services f. Cost of advisory services Complete this question by entering your answers in the tabs below. ReqA Req B and C ReqD Reg E and F Reg G and H g. What is the expected profit of audit services next year? h. What is the expected profit of advisory services next year? (Loss amount should be indicated with a minus sign. Enter your answers in dollars and not in millions of dollars.) 9. Expected profit (loss) from audit services n. Expected profit (loss) from advisory services